RETAIL ADVISORY GROUP October 2012

Ensuring we have a sustainable network by: THE WHY? Ensuring we have a sustainable network by: Sending the appropriate pricing signals to customers Increasing competitive pressure amongst retailers

BACKGROUND Load was growing at twice the rate of kWh growth Network upgrades driven by load growth not kWh growth. Transpower charges driven by load growth. Significant dedicated assets to de- energised installations.

BACKGROUND (Continued) Many of the customers causing the load growth paying relatively low lines charges e.g. seasonal businesses and holiday homes Incentivised to increase load Urban domestics lowest decile – ability to shoulder cost burden limited. Predominately rural (dedicated assets) 25% of domestics holiday homes Significant seasonal businesses

OHAKUNE SUBSTATION LOAD OVER TIME EXAMPLE OF LOAD GROWTH OHAKUNE SUBSTATION LOAD OVER TIME

Background (Continued) 2004 – non incumbent retailers advised us they could not charge different fixed charges: Holiday homes Transformer charges Dedicated lines 2005 – direct billing 2007 – load charging Recognition pricing signals wrong Need to raise revenue from holiday home and seasonal areas as areas of greatest capex growth but very low return. Customer expectation – line charges should be even

TLC CHARGES Capacity Charge– (Network charge) – the maximum load an installation needs at any time. Dedicated Asset Charges – Transformers, meters and relays kW load charge–based on a customer’s load level multiplied by the regional rate Regions– Te Kuiti/Otorohanga, Taumaranui, Ohakune, National Park, Turangi and Whakamaru.

BILLING DIRECT Higher rural network charge $1.085m Transformer charge $2.487m Extra holiday home charges $1.730m Seasonal establishments $ .860m Vacant installations $2.222m TOTAL $8.386M TOTAL LINES REVENUE $32.23M Advised that none of the above can be billed through retailers as the tariffs were deemed to be too complex.

If the above revenue was not collected then line charges would have to increase by up to 42% on the balance of our customers (excluding major industries).

Commerce Commission Release Comparative Lines Charges Does not include Transpower charges.

Lines charges based on kWh consumption Negative Spiral Lines charges based on kWh consumption Consumer reduces consumption bill Consumption reduction not achieved over peak periods of usage = no cost reduction for company No cost reduction for company = price increases for customers No focus on network costs or load management Focus on a sustainable network - both Lines prices rise (e.g. Top Energy) infrastructure, load management and customer affordability – Future lines prices decrease

Is a holiday home different? One Week Profile (school holidays) kW load charging for 2.51 kW Consumption over 7 Days 105 kWh Average daily consumption 15 kWh Monthly charge: kW load $53.29 kWh $27.98 Shortfall $25.31 Charging kWh for holiday homes means that residents of the area subsidise the holiday home owners

Direct Billing

Annual Bill – Average Urban Domestic (MED comparison base) PRICE TRENDS Annual Bill – Average Urban Domestic (MED comparison base) LINES 2010 2011 2012 TLC - Waitomo 798.40 816.80 842.40 Vector 786.40 860.00 New Zealand 756.00 777.60 843.20 DELIVERED ENERGY TLC + King Country Energy 2,093.60 2,105.60 2,132.80 TLC + Trustpower 2,089.97 Waipa + Trustpower 2,118.52 Mercury + Vector 1,988.80 2,063.20 2,181.60 2,031.20 2,116.80 2,215.20 Trust owned – no control over retailers, only have influence over TLC. With community ownership there is more to consider than maximising profit. Direct billing may have added to TLC costs, but it has not contributed to increased bills for delivered energy.

Transpower costs will reduce Reduce company costs Positive Spiral TLC charges by kW load Consumers can choose to reduce their usage over peak periods of power consumption Peaks evened out Transpower costs will reduce Reduce company costs Keeping prices reasonable for the customer No focus on network costs or load management Focus on a sustainable network - both Lines prices rise (e.g. Top Energy) infrastructure, load management and customer affordability – Future lines prices decrease

LOAD CHARGING - OUTCOME Transpower charges not increasing at the same rate as the rest of the industry due to lower load growth. 2012 Transpower increased its charges by 20%. This plus normal lines increases resulted in increases in lines charges elsewhere in NZ in April of approx 10%. Our Transpower charges went up in total 8% Transpower price saving at Ohakune $500,000 pa Transpower saving elsewhere - $780,000pa Network upgrade saving estimated by Engineering Manager at a minimum of $1 million a year. Current price saving - $800,000 pa

CUSTOMER FOCUS Increase customer understanding of load: Engage with customers in their own homes and within the communities we serve Providing education on what load is and the effect on the network Provide advice and assistance for customers that have difficulty managing load Educating customers on how they can shift kW load off the peak periods and offering Time of Use meters and load monitoring technology Offering advice on energy conservation if they do not have a Time of Use meter We can help you by suggesting a solar cell and battery for your electric fence unit or security lighting. Call us.

CUSTOMER ENGAGEMENT A dedicated customer engagement team established to deliver the above customer focused education and advice Community Trust (Ruapehu/Turangi) set up to provide total energy advice to members of our local communities – Molly Melhuish involved.

DIRECT CUSTOMER CONTACT Direct responsibility for after-hours customer fault service – requested by our customers Direct responsibility for any customer compensation claims – over and above requirements of Customer Guarantees Act

Customer involvement Direct billing means TLC customers know what they are paying in network charges

COMMUNITY ENGAGEMENT - EXAMPLE We held two public meetings in Ohakune in December 2011 and February 2012 to discuss the issue of capacity at Transpower’s substation. Transpower agreed to alter the way it charged for the new transformer so that customers ended up saving over $150K Community feedback to Transpower contributed greatly to the decision during the first public meeting

Community Engagement Further CPP commenced on trading off price for increased outages. Customers can meaningfully engage as know price

NATIONAL GROUPS - DOMESTIC ENERGY USERS NETWORK (DEUN) Contracted to research how easy is it for our customers to shift load What role do the various load monitoring technologies play in the success of shifting load?

Low barriers to entry No prudentials Customers contact us direct for any network related query/complaint Retailers competing mainly on energy price – as was expected in lead up to 1999 reforms.

Use of System Current – model agreement minus those clauses covering billing/ prudentials / other transactions through the retailer Main requirements: Provide meter reading info ( 2 way) Provide customer info ( customers may not be the same) Provide large outage info ( us to retailer) Provide information on medically dependent customers and other such statutory information (2 way) Discon/recon monopoly

Customer Contract Largely based on model Customer not necessarily energy consumer – longer term relationship as assets provided to the place. Standards on outages etc as per Consumer Guarantees Act Currently being reviewed by Russell McVeagh for Consumer Guarantees reforms.

CONVEYANCING REQUIREMENTS Extract from the EA 2012 Annual Report – “Simplify and standardise to a greater degree lines company use of system agreements to reduce barriers to entry in regional markets by retailers” Annual Report 2012, Page 4 – Promoting Competition

Summary Achieving Sustainability through Elimination of load growth that no-one wants to pay for Separating security of supply costs from energy savings for those looking at distributed generation within an installation Customer participation in standard setting – lower capex leads to lower price Low barriers to entry encouraging retail competition – sustained pressure on energy price.